It seems that the more intense the chaos, the deeper the changes emerge from it. In the present post-Covid-19 chaos of supply disruptions, 40-year high inflation rates, and a war in Europe—we seem to be on the brink of a major monetary pivot. To understand its implications and how digital assets fit into it, we first must revisit the previous reset.
World War II as the First Great Reset
As World War II chaos was coming to closure in July 1944, it birthed a new paradigm we still live in today. In the Bretton Woods mountain resort, 44 nations set up a new international monetary system. The arrangement was simple.
As the economic and military powerhouse, the US would become the monetary center, as other nations would peg their currencies to the dollar. In turn, the dollar itself would be pegged to US gold reserves, at $35 per ounce. Other nations would then contract or expand their USD supply within the 1% range of the fixed-rate, as investors used forex brokers to exchange foreign currencies.
President Richard Nixon abandoned the gold peg in 1971—and effectively the Bretton Woods system altogether—framing it as “There is no longer any need for the United States to compete with one hand tied behind her back.” Yet, the Bretton Woods legacy remained. Both the International Monetary Fund (IMF) and the World Bank have served as key cogs for the post-Bretton Woods era – the petro-dollar.
The US as the World’s Money Controller
President Nixon was correct in that the gold peg hobbled US expansion. On both sides of the equation, the gold peg has a number of issues:
Because the money supply was constrained by a fixed exchange rate, so too were the government’s expansionary policies. These ranged from unemployment interventions to military spending.
Furthermore, the gold peg was a double-edged sword. Although countries that pegged their currencies to the dollar ceded some of their domestic economic policies, they could also redeem dollars for gold.
While the gold itself is rare and expensive to mine, its supply is not fixed. Even so, its supply doesn’t match up with the economic growth of the global economy.
If a nation falls into a deficit, when the government’s income is lower than its spending, it has fewer options available to right the course around the recession storm.
Altogether, it was the last point that made Nixon cut off the gold peg. He needed the Federal Reserve to provide an inexpensive money supply via lower interest rates. In this way, the economy would be flooded with cash, meaning it would grow sufficiently to offset a recession, regardless of the dollar being devalued in the process. Sound familiar?
We have certainly seen record-high stock market gains thanks to the Fed’s injection of trillions of USD, which triggered a new era of retail traders using commission-free stock trading platforms. Needless to say, with the stabilizing gold peg gone, the 1970s were a period of the Great Inflation, just as appears to be happening now.
Nonetheless, things would have been worse without the USD growing into its petrodollar status. In a nutshell, the USD has become the world’s global reserve currency because the US spends nearly as much on the military as the entire world.
With influence over Europe stemming from WWII firmly entrenched and its control over the Gulf states, the US has been using the petrodollar as a vehicle to offset the downsides of unlocking its money supply and relentless spending. Both OPEC (Organization of Petroleum Exporting Countries) and non-OPEC nations, such as Russia and Qatar, have been using dollars to trade oil and gas.
Such a system holds a glaring vulnerability that the West punctured this March, as it took unprecedented financial moves against Russia.
New World Monetary Order Emerging
As a nation with the world’s largest landmass, Russia holds an abundance of energy reserves. Accordingly, Russia’s main exports are energy-related products, at 63%, of which 26% and 12% constitute crude oil and gas, ...
